Accounting for Issue, Redemption and Buy-Back of Shares
This domain tests share capital transactions: issue at par or premium, calls, forfeiture and reissue, redemption of preference shares, and buy-back. The exam emphasises legal limits and journal entries.
Core rules
- Section 52 permits securities premium to be used for premium on shares or debentures, preliminary expenses, discount on issue, premium on redemption of preference shares or debentures, and buy-back.
- Section 53 prohibits issue at a discount except sweat equity shares.
- Calls in arrears are deducted from subscribed capital; calls in advance are shown as a current liability.
- On forfeiture, the amount received is credited to share forfeiture; on reissue, any discount cannot exceed the forfeited amount.
- Preference shares can be redeemed only if fully paid, out of profits available for dividend or a fresh issue, and a capital redemption reserve is created equal to the nominal value redeemed out of profits (Section 55).
- Buy-back under Section 68 is capped at 25% of paid-up capital plus free reserves; board approval covers up to 10%; debt-equity after buy-back cannot exceed 2:1; Section 69 requires a capital redemption reserve.
Worked example
Paid-up equity 50,00,000; free reserves 30,00,000; securities premium 10,00,000. Maximum buy-back is 25% of (50,00,000 + 30,00,000) = 20,00,000. Securities premium is excluded from free reserves for this limit. A capital redemption reserve of 20,00,000 is created to the extent of the nominal value bought back.
Traps
Including securities premium in the 25% base; forgetting the capital redemption reserve; and treating buy-back as a dividend.
Exam focus
Journal entries for forfeiture and reissue, and computation of buy-back capacity.